The Next America

Auto Glass Repair

The story is yet to be posted....but I needed two side windows replaced on my car today (based in Bristol, RI).

Bristol Glass came through for me. $290, same day service (though I needed to go 20 miles to Attleboro and spend a couple hours at a dunkin donuts with dysfunctional wifi). They are a full service glass shop and I'll probably be sending over some glass shelves for a piece of furniture to be cut soon. As a bonus, they did an outstanding job cleaning the broken glass which I considered out of scope for the quote.

Diamond Triumph Glass was $485, next day at their facility in Cranston. Very difficult to explain which windows to the likely foreign-based phone agent. I was surprised since they had replaced a windshield last year for $175, the lowest price of several quotes, and did a great job.

JN Phillips was $550, two days later in my driveway.

Two others didn't answer the phone quickly enough.

Since my deductible was $500....my problem. Auto glass is something you can shop pretty hard and pretty quickly. Most normal mechanics can't do it anywhere as cheaply and quickly as specialists.

The Subprime Crisis

My first thought is that the system worked.

The system where hedge funds and certain other things (like toxic waste CDOs) are limited to high net-worth individuals and institutions. For all the market problems, normal investors haven't been affected (unlike people who need mortgages).

It is unbelievable that hedge funds (and European banks) put their futures on things they couldn't really measure or understand. This should put the nail into much of the quant model. Instead of minting money, they're actually collecting insurance, collecting pennies on an annuity basis until every couple years the market collects dollars.

While the jumbo mortgage market has melted down, the normal people mortgage market appears to be going strong.

I do feel sad about the people who were counting on refinancing their ARM and now have that option closed. I am pretty surprised they didn't understand the terms of the loans and the risks they were taking up front.

I did. 4 years ago I was a perfect buyer for a 5 year ARM. My reset will be financially painful but survivable. I made a conscious financial decision which turned out to be a loss. Given the same situation (without knowing the future) I would make the same decision. Plenty of real estate investors took a financial risk and lost big. Hopefully they (like me) had this as part of a diversified financial portfolio.

I'm leaning towards mandatory financial education. Especially for people who can't come up with a "normal" down payment. A no down payment ARM really should be limited to knowledgable investors. Or at least someone who has had to go through an hour or two of basic finance and potential scenarios.

The biggest surprise is that savvy investors haven't jumped into the jumbo resale market. Or subprime/Alt-A with reasonable (20%+) downpayments. If there was a way to participate as an individual investor, I'd be all over it. This should be a down payment crisis, not a general availability crisis.

And for people who have relationships with credit unions or small banks (that hold mortgages and know local areas) the window is still open. The whole brokerage system of national lenders is great until it falls apart.

Things I Have for Sale

The great thing about the web is that if you're selling something obscure, and you're accessible by google, people will find you.

I've seen it a lot looking for parts for my boat engine. There's the dealer network (slow, expensive, high shipping) and everyone else (access to non-OEM replacements, good customer service, quick shipping). Mercury outboards are particularly obnoxious since they don't fulfill your order. Instead, they pass it to a local dealer who may or may not feel like fulfilling it in a timely and complete fashion. After two weeks when you call and its magically shipped the next day, you realize the internet revolution has yet to hit that dealership. So I buy a lot off Ebay and small sellers where I can.

Occasionally you get the wrong thing. Or have to buy a minimum quantity. But my theory is that I can resell these items quick. Because they know they're coming from a real person like themselves. And they're well described. And I ship at reasonable prices (listed is UPS/Fedex Ground; upgraded shipping at my cost; love to combine; pickup in RI). I could do it on Ebay. But the power of google means people will come to me...eventually.

Here goes:

(10/06) 91-13949 $35+5 -- installer tool -- used for installation of seals into a water pump base. Hint: unnecessary if you buy a new base.

(10/06) 26-43035, 26-43036 $16+2 -- seals for water pump bases

(10/06) 43055A 4 $45+5 -- aluminum base (cover assy) for Mercury water pump; with gaskets. Factory sealed. Identical to 19282A2 (the silicon bases originally sold as 19282a1 are no longer sold)

(10/06) 22 816856T 3 $13+4 -- Fuel connector; female connector that accepts yamaha-style two prong fuel line. Factory sealed. From Mercury minimum quantity is 2.

(10/06) Quicksilver Needle Bearing Assembly Grease -- $8+4 Tough to find; Essential for certain lubrications inside the powerhead. Found mislabelled on Ebay as boat trailer grease.

(10/06) 1395-823635 4 -- carb rebuild kit, 1395-9594 Fuel Float, 3 carb gaskets $54+4 -- Not really interested in selling; Will if you need them bad enough.

From my Corvette parts collection. GMpartsdirect.com is pretty good so you'd probably have to be local for these to be worthwhile.

(10/06) 1028-3575 Front Deflector -- wrong part

(10/06) 10419313 Lower Fascia -- right part; wrecked the car and insurance paid for repairs prior to installing

(10/06) 16267411 Interior Thermostat -- right part, still not sure if it would help

Glass roof with cracking in middle layer (cosmetic, no structural issues). Classic problem. Good as core for refurb or a temporary.

And my small Jeep parts collection:

(11/06) 56006867 Underhood lamp shield $8 + $3 -- didn't need it for repair.  

The Cost of Gas

I think the post-Katrina gasoline spike has changed me for good. I finally reached my pain point (I get reimbursed for business mileage, but $500/month for gas between my wife and I was still ridiculous).

When I want something, I now almost always think what's the car cost? The number I use is 30c. Gas today is 12c. Car depreciation is normally about 15-18c. Oil and tires is 1-2c. It's 10 miles to about any big box store from my house. So add $6 for the round trip.

Need to take a package to UPS? Five miles(x2). $2 for pickup seems like a much better deal than it was five seconds ago. $2 for an ATM? Not bad compared to the eight miles to the nearest branch. Go to best buy? Wait two days and get it from buy.com. Two day shipping = $6. In prior years, shopping online was about convenience. Now its about the mileage.

Dupont Tire & Auto

What everyone needs is a good mechanic. This is definitely one of the most difficult things to find when you move into a new town. Because there are a lot of bad mechanics out there. The worst are the good guys who've learned they can rip people off. I've had people swear up and down convincingly that a necessary job is expensive, then driven down the street to have it done at 1/3 the price.

Today I went to Dupont Tire & Auto in Warren, RI to patch a flat tire. $8 and 30 minutes later I was done. There is no way they made any money off me today. But I keep going back. They are an RI inspection station (surprisingly rare). Great prices on tires. Got a new muffler and catalytic converter recently. One hour from diagnosis (failed inspection, fairly blatant). Parts prices equivalent to sources available to me, plus one hour of labor. $330. If your time has any value, you cannot compete with that price. I'm considering getting my AC fixed (broken for two years) in my oldest car -- just because it won't be a $1000 job with them.

One of the owners has opened a performance shop next door (another usually sketchy business). I would go trust them in a heartbeat.

Note: Just counted up the 50 postings I did last year, 11 of which were in January. Welcome 2006!!

Pricing Woes

Interesting article from Chris Palmer about a trip to Abercrombie & Fitch. One thing I like about Massachusetts is their very strict pricing law which pretty much requires everything to have an individual pricetag (or meet some onerous consumer-friendly conditions). I encountered a discrepancy at a high-end liquor store in Waltham. An expensive single estate cognac was about half the price it should be. I brought it to the front and the scan didn't match the price. The cashier happened to be the owner. We ended up agreeing to sell the bottle at his wholesale price (the law does give leeway for "gross" errors). I'm sure he then ran off to fix the problem.

When I was in high school, I'd drop by Office Depot. They consistently mispriced pens. Buy pens, pricecheck them, get them free. It was a routine thing for a several month period.

Financial Models of Your Car

The other day I was thinking -- how much does it cost to own a car? Specifically, was it silly to spend a considerable amount of repairs on my old car when I could buy another?

The first trap is looking at the monthly payment. Irrelevant. The "cost" is the same whether you buy with borrowed money or wish cash.

The true cost is derived by adding depreciation and non-mileage related costs. Non-mileage costs are anything other than gas, oil, tires, fluid changes, etc. These costs are stable with mileage -- you get more for a car if it has good tires. When you buy a new car, you expect perfect tires. So it really only needs to count major repairs, but I tracked them all.

So I developed a spreadsheet: Download car_valuation.xls. And crunched some numbers in Quicken which pretty much cover the running costs of my cars over the past 4 years. I value my cars quarterly using kbb.com by "trade-in value".

The results:

My 1996 Jeep Grand Cherokee (the car in question), had been very expensive initially, at a cost of 37c/mile over the first 45,000 miles. This was due to poor resale value. It then turned into an excellent value, at 10c/mile from 45,000 to 119,000 (even with a new transmission, oxygen sensor, brakes, rear wiper, battery, a/c repairs).

My wife's 2004 Jeep Grand Cherokee is still depreciating hard, with a 38.5c/mile cost over the first 30,000 miles.

My 1997 Corvette (purchased used), turned out to be an outstanding value for the original owner, primarily due to excellent resale value. He got the first 35,000 miles at 45c/mile. I got the next 18,000 at the same price. My total ownership cost (from 35,000 to 73,000 miles) has been 38.3c/mile.

So my wife's new car actually has the same cost as my used Corvette. While the old Jeep is coming in at 1/4 of the price. So trading in the old jeep for a new one (I use it in the winter for 4WD) would be very expensive indeed.

Take my GM Card dollars

So is anyone interested in laundering some GM Card earning $$? I've got about $2000 saved up in a credit card I never use anymore. It is in addition to the GM employee discount promotion. I'll split it 50/50 with a buyer.

How it works:
I add you to my GM Card. A card will be issued in your name, but I'll cut it up on receipt.
You pick a car and negotiate the deal.
I go to the dealership as your cousin or in-law when you close the deal (thus it needs to be in Rhode Island or the Boston area).
They call Household Bank and credit $2000 from my card to your negotiated price.
You give me a cashiers check for $1000.
You drive away in your new car.

I love GM cars. But after buying a Corvette (used) a few years ago, I'm not buying another one anytime soon, especially since my wife is a Jeep fan.

Solving the Real Estate Bubble

The Real Estate bubble continues to go strong. I think it will pop as soon as interest rates start climbing. Interest rates are still at spectacularly low levels in historic terms. This has avoided the massive overhang of ARMs.

Normally, real estate drops due to employment. When people lose their jobs, they can't pay the mortgage. They move elsewhere to where jobs are, forcing sale of the house. This incremental shift in the market (2-3%) depresses the market. This is largely due to the uncertainty of remaining market participants, who will delay initial home purchases or upgrades for a year or more (since they fear losing their own job and they are seeing falling prices). When jobs return, the market accelerates.

What we're going to see is an ARM explosion. The economy could still be going strong -- but if interest rates are up at 6-7%, many people forced to refinance by expiring ARMs will be stuck. They can barely meet their mortgage payments in the original environment. So they'll sell. So prices will go down. Triggering a recession, layoffs, house sales, and a second round of prices going down.

There was a solution to the internet bubble. The Fed controlled two major levers in the market -- the discount rate (which drove margin interest rates) and the margin requirements. The discount rate had little impact since in an environment of 50%+ gains, a quarter of a percent was meaningless. The margin requirements were left untouched at 50% (you can only borrow 50% of your total portfolio). Had margin been raised to 55%, the most leveraged people, who were probably in the most bubbly stocks, would have been forced to pull back slightly. It shouldn't cause a collapse -- just take the heat out of the market.

The Fed should do the same thing for real estate. Impose a minimum down payment of 5%. Outlaw "hybrid" loans where a high-risk "down payment" loan is combined with a conventional 20% down mortgage. This way the Fed is not affecting all the other aspects of the economy associated with interest rates. Instead, it is a focused solution driving at the heart of the problem.

The dark secret of the mortgage industry is that it is no longer relevant to banks whether people will pay their mortgages. As long as the origination and servicing fees are kept, that risk is shuffled off to nameless insurance companies and pension funds. In almost any scenario, these institutional investors will still come out ahead, their losses outweighed by the interest rate premium over T bills they collected for years. There are few if any financial institutions exposed to the risk of an S&L type crisis. But the consequence to Americans as a whole and the overall economy is enormous.

Having just failed to avert one financial disaster, because our old tools weren't up to the task -- why do we stand by idly as we approach the next set of financial shoals?

Homeowners Insurance

The New York Times has an interesting article about insufficient homeowner's insurance.

My take is that people are really missing the point of homeowners insurance. It is to make you (and the mortgage company) whole from the loss of your house. It is not intended to fund the rebuilding of your house (probably with customizations) in place.

A major problem is the lack of available contractors and a rise in building material costs when an area has been devastated (such as Hurricane Charley and the California fires). However, arbitrage will normally control the materials issue. But the biggest problem is outlook.

My current house is the second house I've lived in where the projected cost to rebuild is greater than the cost of the house. This seems extraordinary because the land costs (the lot presumably does not lose value if the house is destroyed) are included in the house purchase price but not the insurance coverage. So the insurance company is making it quite clear that it would cost $50K-100K more to rebuild than the house is currently worth. But if you live in an older house, or in a declining neighborhood, it makes sense. House prices are determined by supply and demand with a supply floor at the construction cost of a new house. House values will not rise significantly above construction cost until land of equal desirability is not available. But there is nothing to stop them from falling if there are bad schools, neighbor's houses in disrepair, or even due to natural wear and tear as the house ages. What is not intuitive is that all houses should be valued below reconstruction costs. All of the external factors that cause house values to rise (neighborhood, schools) influence the value of the lot, not the house. And internal factors such as remodeling can only reverse the effects of depreciation to bring the house closer to reconstruction cost. The problem is exacerbated if the house has special features such as moldings or plaster work. My houses were unusual only to the extent that the land price was insufficient to offset the cost gap between the "as-is" house and a reconstructed house, thus causing the reconstruction cost to exceed the purchase price.

My house has problems -- uneven floors, ancient telephone wiring, aging windows, rotting trim (hey, its from 1865). A new house built to identical specifications would not have these problems and would thus be worth more. And I would probably want other modifications. Which would quickly put me in the realm of custom houses which have significantly higher construction costs (due to intrusive customer involvement and nonstandard requests). Building a house under a microscope is an expensive proposition since it is easier to accept existing compromises that were made decades before (and may well be invisible) than to allow them in a new custom home.

The Carrolls' in the NYT story purchased their house for $172,500. The lot value was about $50K. State Farm is paying $220K (everything on lot destroyed). This is entirely reasonable, valuing the house and personal goods at nearly $270K. The replacement cost is supposedly $400K. This could well be a reasonable estimate -- but the purpose of the insurance is so you can walk away, not hit the jackpot.

They should sell the lot, which will be snapped up by a builder or an investor who can rebuild a house on their own schedule, with a few corners cut, without people breathing down their neck. Then take the money and buy a new house with a new set of compromises which make it affordable. Sure, you can't buy in the same neighborhood (high demand, most houses destroyed). But there are other neighborhoods.

On a personal basis, its a tragedy that most people are forced to leave their neighborhood after a castastrophe. But if you couldn't afford a new custom home prior to the catastrophe, its unclear why the insurance company should provide one as a consequence. People who really want this extraordinary result should be prepared to pay a significant amount for this privilege. This isn't a story of big bad insurance companies -- rather it's a story of the nonobvious and personally painful consequences of a reasonable and economically rational level of insurance.